SVKM’s NMIMS

School of Distance Learning

Export Import Procedures & Documentation

Programme: ITM Semester: II Marks: 30

Ellora Time's Manufacturing Woes

Ellora Goes to China

In 2001, Ellora Time Pvt. Ltd. (Ellora), a company based in Gujarat, India, was the
world's largest manufacturer of clocks. It also manufactured calculators, telephones,
timepieces and educational toys. Ajanta and Orpat were closely held Ellora companies
with a combined investment of Rs 2 billion. Ajanta Quartz (Ajanta) ran the clocks
business, while Orpat Electronics (Orpat) handled the other businesses. The business was
fully financed by the promoters, the Patels, without loans from banks or financial
institutions. The companies, situated in a place called Morbi (near Rajkot in Gujarat),
exported their products to over 60 countries.
Almost all their products, marketed through a countrywide network of 25,000 dealers and
180 service stations, were leaders in their respective categories. For the year 1999-00, the
group recorded a combined turnover of over Rs 2.50 billion. Both Ajanta and Orpat
received awards by the Government of India for superior exports performance throughout
the 1990s. Ajanta, an ISO 9002 certified company, had even received the 'Best
Electronics Industry' award many times

In early 2001, Ellora shocked the corporate world by announcing its decision to shift its
manufacturing activities to China. Commenting on the decision, Ellora sources said that
the decision was more out of compulsion than choice. The company claimed that it was
unable to cope with imports from China that competed directly with its products. As
these goods were much cheaper than Ellora's products, the company was facing serious
problems that seemed to threaten its very survival.

Ellora's decision attracted immense media attention because it came at a time when the
Indian manufacturing industry was facing severe competition from cheap Chinese
imports. Experts feared that the future of Indian manufacturing will be very bleak if more
companies began to follow Ellora's example. Since plant location decisions are integral
for a manufacturing concern, China's favorable manufacturing environment seemed all
set to result in an exodus of manufacturers from India.

Background Note
Established in 1991, Ellora manufactured timepieces under the Orpat brand name. The
overwhelming response to its products encouraged Ellora to manufacture calculators and
telephones as well. These products were also received well by the market and in a short
span of time, Orpat and Ajanta established themselves as good brands. The company
offered over 40 models of Ajanta timepieces including the highly popular 'devotional'
models for both Hindu and Muslim communities.
Orpat calculators were available in 15 different models and were very popular for their
quality and economical price. Telephones were available in around 12 different models.
Ajanta and Orpat enjoyed a 70% marketshare in the timepiece and calculator business
respectively and Orpat telephones held 20% of the market share. Ellora set up its
manufacturing base in the 'Orpat Industrial Estate' in Morbi with a built-up area of
15,00,000 sq. ft. and an overall carpet area of 10,00,000 sq.ft.. The estate housed essential
machineries, such as Wafer Sawing Machine, Automatic Coil Winding Machine,
Ultrasonic Ware Bonders, CNC Plastic Injection Molding Machine, Mould/Dies/Jigs and
a full fledged workshop for in-house mould manufacturing as well.

Around 80% of this machinery was imported. By 2001, Ellora was producing around
15,000 calculators, 20,000 timepieces and 8,000 telephone instruments per day. There
were around 1800 workers at the estate with 90% of them being females. Ellora used 45
trucks for daily dispatch as part of its transportation setup to feed its distribution network
of 25,000 dealers spread across the country. Ellora's products were popular both in India
as well as the export markets because of its manufacturing efficiencies. The company's
overheads were low, which enabled it to price its products very reasonably and
competitively. It had exclusive showrooms in Morbi, Rajkot, Baroda, Surat (all in
Gujarat) and in Mumbai. These outlets were serviced by a network of 150 sales depots
and service stations.

According to company sources, Ellora gave prime importance to R&D and quality. R&D
efforts were described by the promoters as "an ongoing process in which a dedicated
team is constantly engaged under the direct supervision of the directors. Individual
initiative is encouraged at all levels and innovation is sought." All products were
reportedly made from the finest quality raw material in a dust-proof environment, which
ensured better functioning of electronic goods. There were quality checks at all stages of
the manufacturing process. These initiatives paid off in the form of Ajanta receiving the
ISO 9002 certification.

Around 20% of Ellora's output was exported. The company won many awards for its
continual good exports performance, including 9 ECS awards for Excellence in Exports
(Electronics and software sector) in 1991-92, 1992-93 and 1994-95. In 1994, Ellora was
honored by the Electronics Department of the Government of India. In 1996-97 and
1997-98, the company received awards for 'Excellence in Export Promotion' from the
Electronics and Computer Software Export Promotion Council. In 1997-98, Ellora
received a 'Certificate of Merit' from the Ministry of Commerce, Government of India for
its export performance during that year.

In its initial years, Ellora imported spare parts, raw material and components from Japan,
Taiwan and Korea. However, from 1998, the company began to import these items from
China, which were not only good in quality, but were much cheaper as well. Little did
Ellora know that these very cheap, good quality Chinese imports would soon prove to be
its biggest enemies. Although imports from China had always been trickling in for a long
time, Indian markets were flooded with Chinese imports in the late 1990s. This was
because in 1999, the Indian government removed restrictions on import of electronic
goods.

Thus, clocks, telephones and calculators from China, exactly the same range of products
Ellora had built its empire upon, were suddenly available in abundance. The difference
was that they were much cheaper compared to Ajanta or Orpat products in the same
categories. In spite of the fact that the Patels did not have to pay interest to any lenders,
had the most popular brand in the industry and owned a good marketing and distribution
network, they realized that they were not in a position to compete with Chinese goods in
the Indian market. More importantly, they were afraid of the fact that Chinese goods will
sooner or later affect their export markets as well.

To demonstrate the effect of the Chinese influx on its operations, Ellora cited the
example of the hardships being faced by its calculator business. Orpat was the only major
player in India for calculators. According to company sources, while the demand for
calculators went up from 20 million in the mid 1990s to 40 million in early 2000, the
company's production had gone down from 6-7 million to 2-2.5 million during the same
period. Its market share touched an abysmal low of 5% from 70%. This was because
approximately 90% of the calculators used in India were imported. And a majority were
either smuggled goods or were imported and assembled in India.

In case of imports, the goods were under-invoiced and thus saved a substantial amount by
evading custom and excise duties. In addition, the importer did not have to pay central
sales tax and local taxes. These calculators were sold in the grey market. Eventually, the
cost of such calculators worked out 30-40% cheaper than of those manufactured by
organized sector players like Orpat. The problems were further compounded when
imports came in via Nepal. Under the South Asian Association for Regional Cooperation
(SAARC) Rupee Trade Area (RTA) arrangement, India allowed imports from Nepal at
concessional duty rates. Chinese companies began to use this low duty facility by routing
their goods through Nepal. The problem aggravated because it was difficult to monitor
the country of origin of the goods most of the times.

According to the Indian regulatory setup, while spare part imports were charged a duty of
5%, raw material imports are charged a duty of 25%. Thus, it did not make sense for
manufacturers like Ellora to import raw material at all. Therefore, Ellora began to import
parts from China, assemble them at its Morbi plant and sell them. It stopped purchasing
raw material from the local market, which resulted in many transporters, drivers and
cleaners losing their jobs. While a few years ago, Ellora employed around 15,000
workers, by early 2001, the company had onl about 5,000 employees.

Commenting on the company's sorry state of affairs, Jaisukh Patel (Patel) said, "Chinese
traders have almost ruined our market. We too are shifting to China now because of the
attractive incentives given to manufacturers there. If we don't do that, we will not be able
to compete in the global market and be wiped out." He further added, "We have leased a
building with 300,000 sq. ft. floor space in Shenzhen. Our machinery – worth Rs 3 billion
– will be moved in phases to China. In the first phase, we will shift about one-third of it.
Six months later, we will shift all our machinery."

Analysts however commented that Ellora's decision to shift to China was completely
logical. China had emerged as a low-cost producer that could beat any country in the
world, with the promise of cheap labour, high productivity and attractive government
subsidies. There were a host of other factors that made China a lucrative manufacturing
destination for corporates across the globe (Refer Exhibit I for major factors influencing
plant location decisions).

Why China?
Ellora and the Patels were not the only ones to succumb to the pressure from Chinese
imports. Many manufacturing units in India had to close shop because they could not
withstand competition from the extremely cheap Chinese imports. A leading
manufacturer of fans, Ortem, closed its manufacturing unit in Delhi after it decided to
rely on imports. Many other companies including consumer electronics major BPL had to
either cut back production or sell at prices below the cost of production. Another
company manufacturing fans, T-Series closed its plant in Noida, Uttar Pradesh after it
realized that it could not compete with Chinese imports. Bajaj Electricals also began to
import fans and toasters from China instead of manufacturing them.

A major player in the battery business, Eveready, was forced to close its subsidiary,
Eveready Energiser Miniature Ltd., which manufactured miniature batteries. This was
because similar batteries from China were being sold for just Rs 2 as compared to
Eveready's product, which retailed at Rs 7. Leading tire manufacturers Ceat and JK Tyres
were forced to offer bigger discounts to their dealers, as Chinese tires were around 25%
cheaper than Indian radials.
Besides these, chemicals, textiles including synthetics and silk, ready-made garments,
steel and rubber products were the other industries, whose business was affected by
imports from China. Explaining the benefits of manufacturing in China, Patel said that
the Chinese policy framework encouraged export promotion. It had subsidies for export
production, cheaper power and labor costs, a highly regimented labor pool, fewer public
holidays and low costs of finance, which are some of the major positive features of the
Chinese economy. The tax structure and infrastructural facilities are much better and
manufacturer-friendly in China than India.

China has a large number of production units manufacturing raw material, spare parts and
components. Hence there is no need for importing these things unlike in India, where
most companies either import or start a small unit to ensure regular supply of raw
material and components. This puts pressure on the company's manufacturing efficiencies
as well as finances. Many factories in China operate on a 'zero-inventory' basis which
means the raw material arrives in the morning and the finished product leaves the factory
in the evening. This was reportedly almost impossible to duplicate in India, with a typical
factory owner having to stock almost three months of inventory.
Patel revealed that he had to invest around Rs 300-400 million worth in raw material
stock. As against this, a Chinese factory of equal capacity needed an investment of just
Rs 60-70 million. Even after willing to invest so much in piling up raw material, factories
in India faced many hardships because of erratic delivery schedules on part of the
suppliers, delays in raw material imports being cleared by the ports and legal hassles with
the customs, excise and sales tax officials. According to Patel, the corruption level was
also much lower in China. He said, "Electricity costs Rs 2 per unit in China, less than half
of what I pay in India. The supply is faultless. Exporters get around 19-27% cent
subsidies and free trade zones are easy to set up. The ports clear goods speedily."

Manufacturers also found that finance was easily available in China as against India
where arranging finance was an extremely difficult, complicated and costly process.
Banks such as the China Industrial Bank and China Agriculture Bank not only sanction
loans without much formalities, interest rates are as low as 5.5%. As against this, loans in
India cost around 14-15%. Most importantly, factory owners have to deal with a number
of government departments to get their factories operational. These include the
authorities looking after the Factory Act, the labour department, sales tax, customs,
excise, income tax, pollution control board, the RBI, central and state ministries,
licensing authorities, the RTO, supply department, clerks of revenue office, collector and
the district industry center, to name a few. (Refer Exhibit II for the differences between
Indian and Chinese manufacturing environments).

The China Story

Due to the favorable manufacturing environment, China's growth rate was almost double
that of India's during the period 1980-2000. Also, the country attracted higher direct
foreign investment than India. China's export volumes were easily five times those of
India's and around 40% of these exports were products of multinational companies
operating in China. China's superior performance however was not only due to cheap
labour, high productivity and government subsidy issues. It was widely accepted that
Chinese firms were often 'ready to try illegal methods to capture a market.' Chinese firms
reportedly did not hesitate to use smuggling routes and loopholes in India's legal system.

Explaining the rationale for this, T K Bhaumik, Senior Adviser (Policy), CII, said, "The
philosophy of a Chinese manufacturer is simple. It won't claim to sell you the best quality
product, but it will charge you a tenth of the price offered by others. Maximization of
sales is more important for a Chinese manufacturer than profit maximization."

According to analysts, despite the fact that Indian manufacturers were continually
protesting against the dumping of goods by China, the Finance and Commerce Ministries
seemed to be rather lax about the issue. However, the Confederation of Indian Industry
(CII) set up a committee to track Chinese imports. In late 2000, the Federation of Indian
Chambers of Commerce and Industry (FICCI) announced its decision to set up a task
force to examine the impact of growing imports from China. FICCI agreed that various
sectors of Indian industry were facing a major threat from cheap Chinese imports. Since
China was not a part of the WTO, there was no transparency in its accounting systems.
Thus, it was very difficult to ascertain the input costs and claim that Chinese exports
amount to dumpingIn 2001, the government finally initiated anti-dumping investigations
against Chinese toys, sport goods and batteries, in response to the protests. Government
agencies confiscated Chinese goods and the finance ministry unilaterally imposed higher
import duties if the certificate of origin of the goods was China.

It was also made mandatory for 131 imported products to strictly follow the BIS
specifications and packing instructions including the printer's name, prices and other such
details, before they were sold in India. However, according to analysts, these non-tariff
barriers would not be very effective in protecting the domestic industry because the
government still would not be able to prove dumping. This was because it was difficult to
establish that the imports had been made below the normal value and that they were
dampening the prospects of the domestic industry.

What Lies Ahead?

By the end of 2001, Ellora had set up a production base on two acres of land at Ningbo,
in Southern China. In addition, it added a separate production line at the Morbi plant.
These new capacities were established after the company decided to diversify into the
home appliances business. The 200-worker factory in China produced mechanical parts
for home appliances. The range of home appliances products includes hair dryers, house
heaters, water heaters, water dispensers, electric fans, electric irons, emergency lamps,
blenders, toasters, electric kettles, washing machines, air coolers and vacuum cleaners.
These products were to be marketed under the Orpat brand name.

According to analysts, Ellora seemed all set to make a success out of the home appliances
business. According to Ellora Director A O Patel, "Diversification into calculators,
telephones, toys and now home appliances is basically a balancing act to offset the trend
of clock production volumes outstripping demand. Our entry into the home appliances
product segment aims at increasing demand by making available products of Japanese
quality at Chinese prices."

Meanwhile, the 'feared exodus' of Indian manufacturers to China had somehow not taken
effect even by mid 2002. This fact however did not negate the fact that India needed to
put in place a host of measures to sustain its manufacturing industry. According to Patel,
India needed to reform its labor laws, the customs duty structure, increase the
accountability of government employees and strengthen its anti-corruption laws. Until
these changes were put in place, it would perhaps be difficult to stop manufacturers from
relocating their plants.

Questions for Discussion

1. Why do you think Ellora was forced to decide in favor of setting up a factory in China
despite the fact that it had been doing rather well both in the domestic and export
markets. Do you think the company can maintain its success rate in the future with the
new international manufacturing initiative?
2. Evaluate the differences between the manufacturing environments and regulatory
frameworks of India and China. What are the reasons behind the huge cost differential
between the products of the two countries?

3. What is the likely impact of the 'Chinese threat' on the Indian manufacturing industry?
Discuss the options available to the government and the industry.